HONG KONG, Dec 7 (Reuters) - Hong Kong shares rose on Friday
and were poised to round off a strong week at a 2012 high as
signs of a recovery in the Chinese economy spurred more inflows
into mainland-related equities.

The Hang Seng index were up 0.2 percent to 22,294.8
at the midday trading break. The China Enterprises index
of top locally listed mainland firms rose 1.2 percent.

In China, the CSI300 of top Shanghai and Shenzhen
listings rose 1.5 percent while the Shanghai Composite
rose 1.2 percent.

A shift in sentiment on China among foreign investors has
prompted a flow of funds into mainland-related assets ranging
from stocks to exchange traded funds (ETFs) and offshore
yuan-denominated bonds.

"People were gloomier at this time last year, but now,
judging from the flows, they seem to be very optimistic and
positioning for policy changes next year in China," said Larry
Jiang, chief investment strategist at Guotai Junan International
Securities.

According to Citigroup and EPFR data, inflows into
China-focused ETFs last week amounted to just under $1 billion,
and were the bulk of that period's net inflow into Asia.

Large-cap materials and banking stocks led the rally in
Chinese shares with cement and steel producers particularly
strong in Hong Kong.

Shantui Construction rose 3.7 percent and was
the second-most actively traded stock on the CSI300 following
Gree Electric, which fell 5.5 percent.

China Shenhua's 2.3 percent rise made it the
biggest boost on the CSI300. Shenhua shares in Hong Kong
moved up 1.6 percent.

Cement producers China National Building Materials
and Anhui Conch were the top gainers on the H-shares
index. Both rose more than 4 percent in healthy volumes.

Trading activity in Hong Kong, which has remained relatively
healthy this month, was slightly subdued on the day ahead of
U.S. payrolls data that is expected to show a month-over-month
drop, largely due to superstorm Sandy.

Shares of insurer PICC Group had a strong trading
debut in Hong Kong, rising as much as 7.8 percent as retail
investors who missed out on the initial public offering bought
the stock.

The gains in Chinese shares came ahead of retail sales and
industrial production data over the weekend that is expected to
provide more evidence the recovery is gathering pace even as
valuations remain cheap.

According to a Credit Suisse analysis that measures
price-to-book ratios against return-on-equity, China is the most
undervalued market in Asia.

Analysts have become more optimistic on earnings over the
past two months and now expect MSCI China constituents
to grow earnings by about 9.5 percent over the next 12 months,
according to Thomson Reuters I/B/E/S.

In September, which saw the biggest cuts in forecasts in
2-1/2 years, analysts on average expected earnings for the year
ahead to grow just 7.4 percent.

A steady improvement in economic data combined with signs
that China's new leadership will pursue reforms has lifted the
Shanghai Composite up 5.4 percent from its year-low of 1949, hit
last week.